Unlocking the Power of Sustainable Finance as a Key Catalyst for the Climate Transition

Note: Ms. Zvan is a member of the Sustainable Finance Action Council and a member of Canada’s Expert Panel on Sustainable Finance

The climate crisis requires an approach that allows for enhancing livelihoods while at the same time drawing down emissions to net zero. It’s a path that relies on the deployment of low-carbon solutions across industries and society to affect unprecedented systems change.

The sheer scale of the transformation necessary to meet the climate targets set out by the Paris Agreement necessitates what McKinsey calls the “largest reallocation of capital in history,” spurring a global demand for climate investment that is estimated to be worth between US$9 to $12 trillion by 2030.

While finance is not a silver bullet to solve climate change, it has a key role in prioritizing and incentivizing measures aligned with sustainability and climate resilience objectives.

However, the flow of capital requires frameworks to ensure a trajectory towards desired outcomes: to move the global economy closer to meeting net-zero targets at the required pace.

There is growing consensus that sustainable finance can enable us to move toward our climate targets and facilitate economic growth, for example, by enabling firms to accelerate their net-zero plans; providing funding for cleantech firms to scale innovations and accelerating adoption of green energy, buildings, infrastructure, and transportation.

For the investment community, it is not only about capitalizing on opportunities that come with financing the technologies and solutions that will help create a more sustainable future; it is also a matter of managing risks.

I lead UPP, a multi-employer defined benefit pension plan, where we have a commitment to achieving net-zero portfolio emissions by 2040 or sooner, with an emphasis on decarbonizing the real economy. As we see climate change as an issue of material financial concern and one of the greatest long-term systemic threats we face, this has been a priority from day one.

Meeting this goal requires due diligence – and confidence in the disclosure of companies and sectors about their climate risk. That’s why we work with partners to strengthen what we consider foundational pieces for sustainable finance: proactive company-level climate disclosure and a region-specific taxonomy – in this case, Canada.

Company-level Disclosure

The first is climate-related financial disclosures – because investors can’t make climate-smart investment decisions without consistent and comparable information from companies.

Capital providers are increasingly looking for information that integrate economic and environmental disclosures – as this provides clarity that allows them to make sound investment decisions.

In the absence of disclosures, the finance community is forced to fill in the gaps. When faced with incomplete information, investors have a bias to slowing down, making smaller investments, or not making investments at all.

The appetite for frameworks that measure financial performance against sustainability parameters became evident last year, when the International Sustainability Standards Board (ISSB) issued global sustainability and climate disclosure standards, where sustainability-related information is provided alongside financial information – in the same reporting package.

At COP 28, the ISSB issued a statement that the reporting standards gained the support of almost 400 organizations globally and investor group representing investors with more than US$120 trillion assets under management.

This prompt response showed that the finance community saw this as a step in the right direction – towards the goal of improving trust in company disclosures about sustainability to inform investment decisions and inspire confidence in capital markets worldwide.

What has become abundantly clear is the importance to connect our economic and environmental aspirations in business as well as at a policy level. While company-level climate disclosure is evolving quickly on the international stage, the challenge is to nudge uptake and compel companies of all sizes and sectors to take this seriously.

Sustainable Finance Taxonomies

In addition to company-level climate disclosures, it is further helpful to place these metrics in the context of regional, national, or international climate goals, and that’s the purpose behind implementing sustainable finance taxonomies.

Representing a foundational component of sustainable finance, taxonomies are sorting tools that are grounded in climate science. Taxonomies allow investors to understand which projects, assets and activities are aligned with a 1.5°C pathway – and gauge a company’s or sector’s readiness for the future. They provide clarity and alignment between capital markets and a country or region’s net zero transition path.

Providing a common definition to classify activities or assets as “green” or “transition” and the policy certainty that comes with it not only helps to clear up potential misinformation and greenwashing – it also allows for a greater alignment between capital markets and climate objectives.

We have already seen since such frameworks gain widespread support at a global level. Taxonomies are in development or operational in over 40 jurisdictions, including the E.U., the U.K., Australia, ASEAN countries, Brazil and Mexico.

Most are green taxonomies, meaning they identify projects that are net-zero or low-carbon, for example, clean energy, battery storage, electric mobility.

Australia, the ASEAN region, and Canada have introduced the concept of transition taxonomies which focus on helping high-emitting sectors to reduce emissions step-by-step way to align with a 1.5°C pathway. This is especially important for Canada because our economy is driven, in part, by industries that are heavy emitters – whether that’s oil and gas, or manufacturing.

Reports on outcomes attest to the benefits of taxonomies, including returning investor confidence, according to a recent report by the Platform on Sustainable Finance, an advisory body to the European Commission.

Mairead McGuinness, the E.U.’s Commissioner for Financial Services, Financial Stability and Capital Markets Union, put it like this: “Companies are using the taxonomy to set targets and back up claims on sustainability, which is helping them access finance. Auditors can see the shift in companies’ mindsets – moving from general goals to specific targets. Investors and lenders are able to compare companies’ transition efforts. All of this is helping to shift financial markets towards sustainability.”

Solving climate change requires collaboration, but in terms of attracting capital and investment, it is a competition. For example, the cost of Canada’s net-zero transition is estimated to be in the range of CAN$125-140 billion per year. Today, investments amount to only an estimated CAN$15 billion per year.

This is a massive gap that cannot be filled by government funding alone, for example, through programs, incentives, and tax measures—we need to attract foreign capital to make up the shortfall.

Without the roadmap provided by a taxonomy, investors will seek that clarity and confidence in their investments elsewhere. And as investors ramp up commitments to green financing, companies will face increasing competition from all over the world for sustainability-related investments.

Making a real-world impact

Taken together, disclosure and taxonomies represent foundational components for sustainable finance. Implementing them brings greater certainty and transparency for investors and companies alike.

Since the move to net zero requires systems change, sustainable finance needs to be mainstreamed and put into action in every area of the economy. It needs to be levered up to help us achieve our climate objectives.

We need to come together – with voices from the financial sector, government, science and industry as well as advocates, Indigenous groups and community leaders – to create a credible path to net zero. And we need to unlock the capital to get us there.